PAYING FOR SOCIAL SECURITY

LDP ‘forced’ to propose sales tax hike: Yosano

Ballooning social security costs will force the Liberal Democratic Party to propose a consumption tax hike in the coming year so the new rate can take effect in 2009, according to LDP heavyweight Kaoru Yosano, who is versed in financial matters and a strong advocate of raising the levy.

“We will not be able to avoid mentioning the consumption tax rise (for 2009),” Yosano, 69, who was chief Cabinet secretary in the Shinzo Abe administration, told The Japan Times in a recent interview.

Fiscal 2009 is when the government’s financing of the basic pension program will rise to half from the current one-third, and the money has to come from somewhere.

The LDP’s financial reform study group, headed by Yosano, said last month the 5 percent consumption tax needs to be raised to around 10 percent in the middle of the next decade to finance swelling social security costs, as more baby boomers become pensioners.

The government’s draft budget for fiscal 2008 announced Monday shows clearly the heavy burden of social welfare services. The total was put at ¥83.06 trillion, rising 0.2 percent above this year’s initial budget due in part to higher social security costs. Social security outlays would increase 3.0 percent from a year earlier.

The proposal by Yosano’s study group called the consumption tax a “social security tax” to ensure that revenue from the levy is used for such purposes.

But the LDP’s annual tax reform proposals for fiscal 2008 made earlier this month skipped mentioning the timing and specific percentage of any rise in the consumption tax.

“The only reason for the party avoiding mentioning (the timing and percentage) is everyone (in the LDP) was worried about an election,” Yosano said.

He said expectations that there may be a Lower House election next year stopped his fellow lawmakers from stating that the tax could go up.

The consumption tax has always been a ticking political bomb. When the LDP-led government introduced it, at 3 percent, in 1989, and again when it hiked the levy to 5 percent in 1997, the party experienced crushing defeats in national elections.

Asked if the LDP can really propose a tax rise next year, Yosano, who is a Lower House member, said: “The party needs courage to bring it up, even if it loses an election. If the budget falls apart, it would be a big tragedy for the people.”

Yosano flatly rejected the idea that spending cuts should come before a consumption tax hike.

He said there is no fat in the budget, meaning there is no room for belt-tightening while providing sufficient public services.

“You need to rid yourself of any belief that there must be a surplus somewhere in the budget,” Yosano said.

His comments were apparently meant to counter former LDP Secretary General Hidenao Nakagawa and former Economic and Fiscal Policy Minister Heizo Takenaka, who are critical of Yosano and other lawmakers calling for raising the consumption tax.

Both Nakagawa and Takenaka, who is now a professor at Keio University in Tokyo, have said the government should make maximum efforts to slim down the debt-ridden budget before deciding to raise the consumption tax.

Nakagawa this month condemned tax advocates and said there are excessive reserves, worth nearly ¥40 trillion in total, in special accounts for fiscal loan program funds and for foreign-exchange funds. He said they had surpluses even after some of the reserves were used in fiscal 2006 to cover budget deficits.

Yosano stressed that each special account has its own reason to exist. For example, the fiscal loan program account is a hedge against a jump in interest rates, while that for foreign-exchange funds is for currency risks.

Bending to the criticism in part, the Finance Ministry later announced that it will use ¥9.8 trillion from a special account reserve for fiscal investment and loan programs, to repay government bonds early.